Our current understanding of what undesirable systemic effects may arise and how to cope with them is very limited. Progress in this direction is vital for the well-being of the EU economy and requires combined efforts and competences. Furthermore, because the sustainability of the financial system is a societal issue, the input of civic society cannot be neglected. The fact that financial instruments are complex and require very specific competences implies that it is not easy to engage civic society directly in the discussion of the details of the policies and their effects. However, it is possible and socially desirable to increase the transparency over the interests of the stakeholders involved in the decision making process around policies. Indeed, it is widely known that pressure exists from the financial sector on the decision making process that should determine how to regulate the financial sector itself.
In this unit, we
Following the financial crisis of 2007–2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilize the financial system, that is, market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details.
Pathways towards instability in Financial Networks M. Bardoscia, S. Battiston, F. Caccioli, G. Caldarelli, Nature Communications 8 14416 (2017)